Until now, German funds have frequently outsourced parts of their business to London, such as risk and portfolio management (“outsourcing” as defined in Section 36 of the German Capital Investment Code (Kapitalanlagegesetzbuch – “KAGB”)). As the original Brexit date approached, fears grew in the German fund industry that it would be cut off from the knowledge of the financial centre London. The future of such businesses, which had previously been outsourced to London, was uncertain. Alternative investment fund managers (Kapitalverwaltungsgesellschaften “KVG“) therefore approached their portfolio managers in the UK to develop alternative structures that could be used as a kind of emergency plan in the event of a “no deal” Brexit. Otherwise, as BaFin pointed out to the KVGs, the outsourcing agreements with portfolio managers in the UK within the meaning of Section 36 para. 1 sentence 1 no. 4 KAGB would have been illegal. Outsourcing to UK portfolio managers would therefore no longer have been possible.
However, KVGs can now breathe a sigh of relief: BaFin recently concluded a Memorandum of Understanding (“MoU“) with its British counterpart, the Financial Conduct Authority (“FCA“). In terms of content, the MoU regulates the cooperation on outsourced transactions in the fund industry.
The conclusion of an MoU is a necessary prerequisite for the outsourcing of portfolio and/or risk management to a company located in a third country – such as the UK once it has left the EU. Specifically, the MoU must provide for rules on information exchange, supervisory cooperation and enforcement.
The MoU is to apply in the event of a “no deal” Brexit, if there is no withdrawal agreement in place between the EU and the UK.
In addition to the MoU with BaFin, the FCA has also concluded a multilateral MoU (“MMoU“) with the competent national supervisory authorities of the EU to ensure that the requirements discussed above are met. Further, the FCA and the European Securities and Markets Authority (“ESMA“) have concluded an MoU regarding the supervision of rating agencies and trade repositories. Both the MMoU and the MoU should be in force in the event of a “no deal” Brexit.
By concluding the MoU with the FCA, BaFin has not followed the instruction of the European Commission not to conclude any bilateral cooperation agreements in order to not affect negotiations with the UK on a withdrawal agreement (or the subsequent ratification of such agreement). Nevertheless, the MoU has a positive aspect: The future of outsourcing businesses to London is no longer uncertain. In fact, the emergency plans of German KVGs – at least in this area – are no longer valid.